For those who are familiar with the adult entertainment industry, the dearth of publicly traded companies on the market will perhaps not come as much of a surprise. Indeed, the industry’s biggest players are usually privately owned affairs.
From Manwin Holdings, which seem to be responsible for the entirety of adult internet sites, to Larry Flynt’s Hustler magazine, casino, and club franchises, to the various film studios and magazines, it might appear as though the adult entertainment industry has an aversion to the market.
Rick’s Cabaret International, Inc. (RICK), on the other hand, has been an exception to the rule. Rick’s has been developing the concept of high-end gentlemen’s clubs mixed with upscale restaurant and bar service since 1983. The company currently has 38 locations in operation across the United States in major metropolitan cities such as Dallas, Houston, Minneapolis, New York, Miami, Philadelphia and Los Angeles, with more on the way.
President and CEO Eric Langan has been with the company since 1998, and has spent the better part of that time expanding operations and consolidating the Rick’s Cabaret grip on the niche dining/adult-entertainment live-club experience. It is to his credit that the company has this market more or less cornered these days.
We recently had an opportunity to speak with Mr. Langan about his growth strategy, about where he sees the greatest opportunities for his company over the near and long-terms, as well as forthcoming moves that will increase value for shareholders, while allowing the company the flexibility to expand into locations that are best suited to its needs.
EQ: Can you start by providing us a brief description of Rick’s Cabaret and its operations?
Langan: We are publicly traded on the NASDAQ. We are in the adult entertainment business, and are diversifying into locations that are non-adult restaurant/nightclubs, beginning with the “Bombshells” venue in Dallas. So we are taking our experience with nightclubs and nightlife, and with adult entertainment, and converting it into a more user-friendly restaurant where the staff is still part of the entertainment, as well as live music in the evening times.
Langan: We’re going to continue to grow through acquisition of adult entertainment clubs, and of course building, like our second New York location that will open hopefully in October. We’ve got a branding partnership with Vivid Entertainment, and we will also call our new LA location Vivid Cabaret.
So we’re still building new cabaret venues where we find the rare license or the rare location we can open, as well as acquiring existing clubs, which we like to do. A recent example is the Jaguars acquisition we did last September, which added 11 venues and over $15 million in annualized revenue. I think our current run rate is roughly $115 million annually now.
EQ: Rick’s Cabaret just reported record sales for the first quarter, and it does seem as though Rick’s has been able to navigate the market better than its competitors in the adult entertainment industry. What do you perceive as your strategic advantage in this regard?
Langan: Customer service is where we do it better than most. The way our systems are set up, and the way our management team and staff are rewarded for long-term thinking versus short-term thinking, is what really makes a difference in how we do things versus how our competitors do things.
EQ: So if you wouldn’t mind telling us a bit about your background in the industry and how it has helped you to grow Rick’s Cabaret?
Langan: I started out in the industry at basically 19 years old. I sold my baseball card collection when I was 20 to open my first club. I opened that right after my 21st birthday, and I parlayed that into several other locations. Then we went public in ‘97, and then merged with Rick’s in 1998, and took over Rick’s Cabaret in 1999.
After the acquisition in 2004, and the opening of the club in 2005 in NYC, we had a tremendous growth period where we went from a handful of locations to today where we have 41 locations. We have 37 operating and four in the construction process right now. So we’re continuing to grow. We’re looking at other opportunities as well, and also expanding to the restaurant/night-club type crossover. I call it the “crossover medium”, with our Bombshells location in Dallas and the new Ricky Bobby Sports Saloon location in Ft. Worth that should open in June or July.
We’re going to take those kinds of concepts, and we’re trying to basically set them up to cookie-cutter them so that as we prove those concepts out we can do multiple locations and have pretty rapid expansion, and you know, it gives you a great opportunity for growth.
We have two pathways available to us on a go-forward basis so we can hit our target of 20 to 30-percent annual growth in revenues. Whenever we can’t find the proper acquisition target because either rates are too high or just because we can’t find the acquisition we want or the terms we want, then we’ll be able to just greenfield or find a restaurant or building that was formerly a restaurant that wasn’t working and re-concept it with our concept.
It’s much cheaper and easier, and we can guarantee growth with that. We definitely know what the standard restaurant will do based on demographics and we can say, “OK, this is a $3 million per-year spot. We need to add $10 million of revenues, so we’ll build three or four of those, which will enable us to meet our goal.” That’s better than needing to buy $10 million of revenues from existing adult clubs out there, but then being unable to find what we need on just the right terms.
EQ: You’ve pretty much alluded to how busy Rick’s has been over the last few months and what you will be up to in the near future. Are there any other significant developments that we haven’t touched on?
Langan: I think we’ve covered most of the newer developments we’re working on right now. We do have a very deep list of acquisition candidates we are currently reviewing as well. Now that we’re starting to get the restaurants open and running, and generating positive cash flow, making it profitable, we are now looking at other new restaurant locations. That’s clearly what our focus is going to be for the next two or three years. We’re going to do everything we can to hit those target growth rates of 20 to 30 percent, and keep that growth rate going.
EQ: Are there any other key points that the investment community should know about when looking at Rick’s Cabaret?
Langan: I think the other thing we can touch on is our significant real estate holdings. Unlike most restaurant chains that go out and lease the majority of their property, we actually own the majority of our property. We own about 85 percent of our property. So we’re also looking at a way to capitalize on those real estate holdings. We generate about $30 million in EBITD right, so we’re going to look at a way to return some of that capital back to shareholders, and at the same time, keep growing the company. We originally looked at a type of dividend with all the cash flow we’ve got coming in, between $1.5 million and $2 million in free cash flow. So now we’re looking at a real estate investment trust, where we would dividend our existing shareholders by putting the real estate into a separate publicly traded REIT, and be able to pay a dividend without paying the corporate income tax. We’d use the tax advantages of the REIT to redistribute that money back to our shareholders.
So we’re in the process of basically reviewing and studying the feasibility and cost of doing that. So the market should watch our moves on that over the next three to six months. A lot of gaming companies and lots of other big companies that have lots of real estate are following that same format, and we see the advantages of it. So that’s what we’re looking at as well right now.